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- Work capital loans come in different forms and can be used to cover short-term expenses
- Your credit score and how much you can afford can impact your available loan options
- Compare lenders and types of working capital loans to find the right one for your business
A working capital loan is an umbrella term used to encompass a variety of loan products. The main thing to know is that if you talk to a lender about a working capital loan, you’re telling them you’re looking for short-term financing. You might use this to cover payroll or lease payments during a seasonal ebb, for example, not a long-term expense like financing real estate or major equipment purchases.
As a result, short-term loans can be working capital loans, but so can lines of credit, business credit cards and merchant cash advances. You have options here. Finding the right one means exploring working capital loans for small businesses based on the various types, what you can afford and qualify for and which lender you want to choose. To help narrow down your options, think about the following questions.
How much can you afford?
First up, you want to make sure that this short-term solution to your cash flow problems doesn’t land you in long-term financial trouble. You need to be able to repay what you borrow. Defaulting could mean tanking your business and potentially even risking your personal assets.
Do the math. You need to know the potential cost of the working capital loan, including interest and fees, and how much you can afford.
Don’t stop there, though. Different lenders attach different fees to their working capital loan offerings. So read the fine print on any loan you consider to ensure you have a good idea of what it will cost your business, both in terms of periodic repayments and in terms of total loan cost (including interest and fees).
If you’re trying to get a bad credit business loan to cover short-term expenses, budget more for the cost of your loan. A low credit score will mean a higher interest rate and more fees.
Use a business loan calculator to get an idea of how much your working capital loan will cost over its life and the amount of the monthly payments.
What type of working capital loan?
Working capital loans for small businesses can take different forms. The right short-term option for your company will depend on your personal and business credit scores, your preferred repayment timeline and even how your customers pay you. Here are a few of your options:
|Lines of credit||
|Business credit card||
|Merchant cash advance||
Not sure a working capital loan is right for you? Check out our alternatives to learn more about different types of long-term financing solutions.
Interest rates vs. factor rates
As you’re digging into different working capital loan options, you might see the cost of your business loan expressed in one of three ways: as an interest rate, as an annual percentage rate (APR) or as a factor rate.
Interest rates are expressed as a percentage. APR is also a percentage, but it tells you the total cost of the loan over a year, which means it factors in any fees.
Factor rates get expressed as a decimal. You’ll most frequently see a factor rate with high-cost loan types available to businesses with bad credit, like merchant cash advances and invoice factoring.
One key difference to note is that while interest payments go down as your loan amount decreases, factor rates stay the same for the life of the loan. It’s also a good idea to convert factor rates to interest rates so you can compare loan products and get a more accurate idea of how costly they can be.
What’s your credit score?
As you’re exploring working capital loans for small businesses, your personal credit score will play a big role in your available options:
|700 or above||You should have the full run of choices available, which means you can look to traditional lending institutions like banks and credit unions. These generally offer the lowest interest rates.|
|650 to 699||You’ll still have quite a few choices and can likely qualify for an SBA working capital loan, which can help to keep your interest rate down.|
|600 to 649||You can see if banks and credit unions will work with your business, but an unsecured working capital loan is likely off the table unless you go with a high-cost option like invoice factoring.|
|500 to 599||You’re right on the cusp of getting stuck with expensive financing options like merchant cash advances and invoice factoring. Explore online lenders since their eligibility requirements are generally looser.|
Now, it’s time to start the main comparison work. Look into specific working capital lenders to get a feel for their working capital loan types, along with their rates, fees and terms.
Pay close attention to that repayment term. Many working capital loan options come with a term of a year or less, which means this truly needs to be a short-term solution for your business. Some lenders offer options with terms of 18 or 24 months. This can make payments more manageable, but you’ll pay more in interest.
Examples of working capital lenders
To help you find the right working capital loan for your business, here are a few notable lending institutions to explore:
|Lender||Type of working capital loans||Top features|
|Bank of America||
Are you eligible?
Generally, to qualify for a working capital loan, you’ll need to have:
- At least two years in business
- Annual revenue around $250,000
- Personal credit score of at least 600
Not only can meeting these requirements get you approved, but it can also get you access to favorable terms when applying for working capital loans for small businesses. That said, some lenders will work with people with lower scores, especially if you’re willing to secure the loan.
Securing the loan means putting up something the lender could seize if you default. That could mean offering business collateral, making a personal guarantee (which means putting your personal assets on the line) or both.
That might sound risky, but it could be a boon. An unsecured working capital loan will generally come with a higher interest rate and less favorable payment terms than one that’s secured. Plus, many lenders that work with business owners with fair and bad credit don’t offer an unsecured working capital loan, which means your lending options would be limited.
Working capital loans for small businesses can help you weather a seasonal downturn, deal with a short-term emergency or get through a dip in sales. You should consider these short-term loans only when you know two things: your finances will turn around quickly, and you can make the rapid repayment needed.
Does that sound like you? If so, explore the best working capital loans and your other short-term financing options.
Frequently asked question
Your options might be limited. For example, you probably won’t be able to get an SBA working capital loan. But you should check with specific lenders to see if other factors — like your time in business or your annual revenue — can help to make up for a low credit score. If not, you can always explore options like invoice factoring and merchant cash advances. Just make sure your business is ready for the high cost of these types of working capital financing.
Term loans can come with repayment terms from six months to 25 years. Generally, working capital loans cover short-term cash flow needs, which means only short-term loans (those with terms of 24 months or less) count here. Plus, you have working capital loan options beyond term loans, from lines of credit and credit cards to invoice factoring and merchant cash advances.
Absolutely. A short-term loan can help you get the financing you need to keep working capital on hand. Beyond that, you have choices like a business line of credit or business credit cards or higher-cost financing like merchant cash advances and invoice factoring.